There are of course many themes arising from the Report. Culture, remuneration and governance feature highly and are inextricably linked. In this article we will look at the issues and recommendations in so far as how culture, including how employees are remunerated, has allowed misconduct to occur. It is clear that many of the areas of concern, the risks and the recommendations identified in the Report could apply far beyond the financial services sector. They can apply equally to any organisation with a sales business.
The Report considers what is ‘‘culture’’? It states:1
“The culture of an entity can be described as the ‘shared values and norms that shape behaviours and mindsets’ within the entity.2 It has been described as ‘what people do when no‑one is watching’ 3 and that description captures what might be called the essentially ‘internalised’ or ‘instinctive’ application of shared values and norms. The shared values and norms can be seen as both reflecting and constituting the culture of an entity. It is evident that culture can drive or discourage misconduct.”Although there are obviously many different elements that make up a ‘’culture’’, it is ultimately shaped by the people who work in an organisation and the behaviours they display. How certain behaviours are recognised and encouraged can therefore have a significant impact on culture. It would be naïve to think that ‘’culture’’ doesn’t affect your business. It translates into tangible financial benefits through employee attraction and retention, customer satisfaction and ultimately, shareholder value.
It is also clear that culture needs to be led from top down, from the Board, senior management and line management, working with human resources teams, their risk and compliance teams and internal and external audit. A strong positive culture requires integrity at all levels of management. It’s all very well having company values, but if they are not being lived and breathed in an organisation it breeds a culture of mistrust at best and potential misconduct at worst. However, “that tone must also be echoed from the bottom and reinforced at every level of the entity’s management and supervision.”4
“remuneration and incentives, especially variable remuneration programs tell staff what the entity rewards. Hence, remuneration and incentives tell staff what the entity values. Remuneration both affects and reflects culture. As the Commission’s work has shown, and is now not disputed, poor remuneration and incentive programs can lead, and have led, to poor customer outcomes.” 6The Report also discusses the need for variable remuneration structures to be designed to promote ethical behaviour and compliance with laws and standards, and that they should be implemented so as to manage the risk of misconduct. Design and implementation must each stand up to scrutiny.
The Report concludes that one method of remunerating employee is not preferable to another and neither is a particular percentage of one over another. However, with variable remuneration, there clearly needs to be much more focus on the ‘‘how’’ not just the ‘‘what’’. The findings of the Royal Commission highlight that there needs to be a move away from not just focusing on the outcome but how you got there. We are seeing a growing trend away from reward (still an important factor in motivating employees) being based on financial metrics. The Sedgwick Report7 in April 2017, made 21 recommendations arising out of Mr Sedgwick’s independent review of product sales commissions and product-based payments in retail banking in Australia. The recommendations were that incentives should no longer be paid to any retail bank staff based directly or solely on sales performance. Rather, eligibility to receive any personal incentive payments should be based on an assessment of that individual’s contribution across a range of measures of which sales (if included at all), should not be the dominant component and the maximum available payments should be scaled back significantly for some roles.
Some of the considerations posed by the Report are:
At senior executive level Hayne concludes that “if the board reduces the variable remuneration of executives for their poor management of non-financial risk, and tells other staff that the variable remuneration of those who are accountable for particular events or forms of conduct has been reduced, it sends a clear message to all staff about accountability and what kinds of conduct the board regards as unacceptable”.9
At frontline staff level similar issues exist. Despite some organisations moving away from focusing just on the “what” to the “how” and the “what”, there remains too much focus on the “what”. An example of this is when you unpack the ‘‘discretionary effort’’ applied by an employee as assessed, to find it is actually just a euphemism for selling the [bank’s] products10. This could apply to so many businesses and their remuneration structures. Although many organisations have balanced scorecards, the question is whether there are the right behavioural metrics embedded or whether they are they just using a different set of outcome metrics that would not stand up to scrutiny and ensure the right outcomes
Whether you have commission plans, short term incentive plans, long term incentive plans, discretionary bonus schemes or other, the Employment and Corporate teams at McCabe Curwood are well versed in these areas and can assist with audits, reviews, overhauls and recommendations on a range of incentive arrangements, whether that be an executive or frontline level. We also have experience across the Employment and Corporate teams in preparing employee incentive scheme documentation.
1 Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 4 February 2019, p334
2 Cf CBA Prudential Inquiry, Final Report, 81. I deliberately omit reference to a ‘system’ of shared values and norms if only to emphasise that culture is observed and described, not created apart from, or imposed on, the entity.
3 G30, Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform, July 2015, 17.
4 Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 4 February 2019, p335
5 Australian Securities and Investments Commission, ‘ASIC’s Corporate Plan 2017-18 to 2020-21’, August 2017.
6 Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 4 February 2019, p335
7 Retail Banking Remuneration Review Report, Stephen Sedgwick AO, 19 April 2017
8 Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 4 February 2019, p352
9 Ibid, p 366
10 Ibid, p 368
11 Ibid, p 374, evidence of Mr Elliott of ANZ